Why dealmakers need to be ESG-vigilant

With M&A activity showing little sign of slowing, and emphasis on nonfinancial priorities growing, leaders need to retool their due diligence practices.

Asset

Share

March 9, 2023

The 4,410 senior executives who participated in PwC’s latest Global CEO Survey are doing a number of things to insulate their companies against economic volatility, from reducing costs to raising prices. One thing a solid majority of them (60%) are not doing is pulling back on dealmaking. But while global M&A activity may be robust, the nature of many of those deals is changing. Just a few years ago, environmental, social and governance (ESG) issues were largely the concerns of activist stakeholders and forward-thinking regulators. Now these topics are maturing into a set of due diligence criteria with important implications across the M&A landscape. As the scope expands to include a broader range of non-financial priorities and metrics, dealmakers need to watch out for six “orange flags”—potential hazards that may not stop a deal but require proceeding with caution:

  1. Unethical marketing. Look out for messages that are inconsistent with reality, meaning that they don’t align with regulation, stakeholder sentiment or public positions taken by acquirers. Be attuned to inconsistencies in public messages and the efficacy of products, especially in industries where marketing regulation is loose. 
  2. Reputational risks. As has been well established by recent high-profile greenwashing accusations in the corporate world, failures to meet regulations, internal targets and stakeholder expectations can lead to negative attention, knocks to consumer and client confidence, and loss of revenue. Forward-thinking diligence on reputation involves gaining a more robust understanding of a firm’s value proposition in terms of market focus and potential, and verifying a wider set of ESG claims. 
  3. High risks in supply chains. Even as conflicts, trade tensions and weather disruptions persist, the scope of due diligence around supply chain relationships is expanding: modern slavery, health and safety, and labour rights have grown in importance, as has the sourcing of raw materials. 
  4. Disengaged employees. Employees, who are often an important voice for the legitimacy of a company’s ESG credentials, continue to be a critical asset at the centre of most deals. Dealmakers are increasingly looking to diagnose staffing losses through specific assessments of social and governance issues, examining areas such as company culture and employee satisfaction. If an acquirer’s talent practices cause workers in the target company to leave, that destroys value. 
  5. The transformative deal that isn’t. Achieving progress in the ESG transition brings risks, especially if outcomes are overpromised or underdelivered. Take the creation of ‘green jobs’ as part of the wider just transition. In OECD countries that are undergoing a construction and infrastructure boom, the construction workforce is predominantly male. As the energy transition occurs and roughly 20 million new green jobs are created, green jobs will likely lean to men rather than women, exacerbating one imbalance even as dealmakers seek to resolve another. 
  6. Inadequate nonfinancial disclosures. A recent PwC survey showed that 87% of global investors thought corporate reporting contains greenwashing. Certainly, inadequate disclosures create regulatory or reputational risk. But if an acquiring company also fails to envision that a high-warming scenario would create serious physical risks for a target, or an accelerated-decarbonization scenario would create significant transition risks, they could miss out on a lot of value. Ultimately, companies will need to disclose more information, as stakeholders demand greater transparency and regulatory thresholds are heightened. But in the meantime, dealmakers seeing orange flags around disclosures will want to value targets under various ESG scenarios, using accurate climate change models. 

Learn more about how to create value in an M&A environment being profoundly changed by ESG.

Contact us

Miriam Pozza

Miriam Pozza

Partner, Deals, Transaction Services Global and Canada Deals, ESG Leader, PwC Canada

Tel: +1 514 205 5286

Will  Jackson-Moore

Will Jackson-Moore

Partner, PwC United Kingdom

Malcolm Lloyd

Malcolm Lloyd

International Business Leader, PwC Spain

We unite expertise and tech so you can outthink, outpace and outperform
See how
Follow us
Hide

Contact us

Rudolf Krickl

Rudolf Krickl

Senior Partner, PwC Austria

Patrick Boone

Patrick Boone

Partner, PwC Belgium

Bojidar Neytchev

Partner, PwC Bulgaria

Sergio Fischer

Sergio Fischer

Lead Partner, PwC Bolivia

Tel: 591-3-3444311

Marco Castro

Marco Castro

Partner/President, PwC Brasil

Tel: +55 (11) 97140 7738

Prince Rahming

Prince Rahming

Territory Leader, PwC Bahamas

Tel: +1 (242) 302 5301

Nicolas Marcoux

Nicolas Marcoux

CEO and Senior Partner, PwC Canada

Tel: +1 416 687-8263

Frazer Lindsay

Frazer Lindsay

CEO, PwC in the Caribbean

Jean-Jacques Mukula

Jean-Jacques Mukula

Partner

Gustav Baldinger

Gustav Baldinger

CEO, PwC Switzerland

Renzo Corona

Renzo Corona

Territory Senior Partner, PwC Chile

Tel: (56) 2 2940 0064

Patricia Pedhom Nono

Patricia Pedhom Nono

Partner in Charge

Tel: +237 690 70 75 22

Carlos Mario Lafaurie

Carlos Mario Lafaurie

Partner, PwC Colombia

Tel: +57 1 6340555 404/ 327

Jiří Moser

Jiří Moser

Country Managing Partner and CEE Advisory leader, PwC Czech Republic

Tel: +420 251 152 048

Lars Baungaard

Lars Baungaard

Senior Partner, PwC Denmark

Ago Vilu

Ago Vilu

Managing Partner, PwC in Ukraine

Maged  EzzEldeen

Maged EzzEldeen

Country Senior Partner – Deals Leader, PwC Egypt

Tel: +20 122 3421 386

Gonzalo Sanchez

Gonzalo Sanchez

Partner, PwC Spain

Patrice Morot

Patrice Morot

Partner, PwC France

Tel: + 33 156578168

Vish Ashiagbor

Vish Ashiagbor

Country Senior Partner, PwC Ghana

Tel: +233 (0) 302 761500

Barry Pillans

Barry Pillans

Partner, PwC Gibraltar

Marios Psaltis

Marios Psaltis

Partner, PwC Greece

Hrvoje Jelic

Hrvoje Jelic

Partner, PwC Croatia

Tamás  Lőcsei

Tamás Lőcsei

Partner, PwC Hungary

Tel: +36 1 461 9358

Nick Halsall

Nick Halsall

Partner, Advisory Leader, PwC Isle of Man

Tel: +44 (0) 1624 689680

Andrea Toselli

Andrea Toselli

Partner | Assurance Leader, PwC Italy

Nick Vermeulen

Nick Vermeulen

Territory Senior Partner, PwC Channel Islands

Tel: +44 7781 111526

Hoonsoo Yoon

Hoonsoo Yoon

Chief Executive Officer, PwC South Korea

Tel: +82 2 709 0201

Loreta Peci

Loreta Peci

Managing Director, PwC Kosovo

Tel: +355 4 2242 254

Graeme Sunley

Graeme Sunley

Territory Leader, PwC Cayman Islands

Azamat Konratbayev

Azamat Konratbayev

Managing Partner, PwC Eurasia Assurance Leader, PwC Kazakhstan

Tel: +7 727 330 3200

Andre Rohayem

Middle East Insurance Leader, PwC Lebanon

Tel: +961 1 200 577

Nerijus Nedzinskas

Nerijus Nedzinskas

Partner, PwC Lithuania

Tel: +370 5 239 2350

François Mousel

Managing Partner, PwC Luxembourg

Tel: +352 49 48 48 2182

Michał Mastalerz

Michał Mastalerz

Country Managing Partner, PwC Poland

Biljana Bogovac

Biljana Bogovac

Partner, PwC Serbia

Miroslav Marchev

Partner, PwC Macedonia

Anthony Leung Shing

Partner, PwC Mauritius

Tel: +230 404 5071

Clive Mukondiwa

Clive Mukondiwa

Partner

Tel: +31 (0)65 154 18 97

Pisit Thangtanagul

Pisit Thangtanagul

Mekong Territory Senior Partner and CEO for PwC Thailand, PwC Thailand

Tel: +66 (0) 2844 1000

João Veiga

João Veiga

Country Senior Partner, PwC Mozambique

Chantell Husselmann

Chantell Husselmann

Country Senior Partner, PwC Namibia

Tel: +264 61 284 1327

Petra Justenhoven

Petra Justenhoven

Senior Partner and Chair, PwC Netherlands

Leif Arne Jensen

Leif Arne Jensen

CEO | Territory Senior Partner, PwC Norway

Tel: +47 952 60 102

Rick M. Danao

Rick M. Danao

Vice Chairman and Assurance Partner, PwC Philippines

Tel: +63 (2) 459 3065

António Brochado Correia

António Brochado Correia

Territory Senior Partner, PwC Portugal

Tel: +351 213 599 405

Dinu Bumbăcea

Dinu Bumbăcea

Partner, Advisory Leader, PwC Romania

Bernice Kimacia

Bernice Kimacia

Partner, PwC Rwanda

Tel: +250 252 5882 03/04/05/06

Sofia Götmar-Blomstedt

Sofia Götmar-Blomstedt

CEO, PwC Sweden

Tel: 0709-29 28 82

Martin Gallovič

Martin Gallovič

Country Managing Partner, PwC Slovakia

Tel: +421 259 350 111

Jamshid Juraev

Jamshid Juraev

Sr. Manager, PwC Turkmenistan

Tel: +998 71 120 6101

Cenk Ulu

Cenk Ulu

Territory Senior Partner, PwC Türkiye

Tel: +90 212 326 6967

Brian Hackett

Brian Hackett

Territory Leader, PwC Trinidad and Tobago

Joseph Chou

Joseph Chou

Chairman and CEO, PwC Taiwan

Tel: +886 2 27296666, x26693

Zainab Msimbe

Zainab Msimbe

Country Senior Partner, PwC Tanzania

Tel: +255 (0) 22 219 2000

Marco Amitrano

Marco Amitrano

Alliance Senior Partner, PwC UK and Middle East, PwC United Kingdom

Miguel Urus

Miguel Urus

Socio a cargo, PwC Argentina

Tel: (54 11) 4850-4660

Abdulkhamid Muminov

Managing Partner, PwC Uzbekistan

Tel: +998 78 120 61 01

Luis Freites

Partner, PwC Venezuela

Mai  Viet Hung Tran

Mai Viet Hung Tran

General Director, PwC Vietnam

Tel: +84 28 3823 0796

Shirley Machaba

Shirley Machaba

Regional Senior Partner, PwC South Market Area, PwC South Africa

Tel: +27 (0) 11 797 5851

Andrew Chibuye

Andrew Chibuye

Country Senior Partner, PwC Zambia

Tel: +260 (0) 211 334 000

Hani Ashkar

Hani Ashkar

Middle East Senior Partner, PwC Middle East

Masataka Kubota

Masataka Kubota

Partner, PwC Japan

Sanjeev Krishan

Chairman, PwC India

Adam Krasoń

Adam Krasoń

Country Managing Partner of PwC in Poland, PwC Central and Eastern Europe

Ljósbrá Baldursdóttir

Ljósbrá Baldursdóttir

CEO and TSP, PwC Iceland

Santiago Mignone

Santiago Mignone

Partner, PwC Argentina

Uthman Mayanja

Uthman Mayanja

Country Senior Partner, PwC Uganda

Michał Mastalerz

Michał Mastalerz

Country Managing Partner, PwC Poland

Lassaad Borji

Territory Managing Partner, PwC Tunisie, PwC Tunisia

Sinforiano Ngomi Elomba

Senior Manager

Paul Griggs

Paul Griggs

Senior Partner, PwC US, PwC US

Matthew Wetmore

Matthew Wetmore

EUMI Industry Leader, PwC Canada

Tel: +1 403 509 7483